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The Value of Governance Variables in Predicting Financial Distress Among Small and Medium-Sized Enterprises in Malaysia

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  • Nur Adiana Hiau Abdullah

    (School of Economics, Finance and Banking, College of Business (COB), Universiti Utara Malaysia, 06010 UUM Sintok, Kedah, Malaysia)

  • Muhammad M. Ma'aji

    (School of Economics, Finance and Banking, College of Business (COB), Universiti Utara Malaysia, 06010 UUM Sintok, Kedah, Malaysia)

  • Karren Lee-Hwei Khaw

    (School of Economics, Finance and Banking, College of Business (COB), Universiti Utara Malaysia, 06010 UUM Sintok, Kedah, Malaysia)

Abstract

Predicting financial distress among SMEs can have a significant impact on the economy as it serves as an effective early warning signal. The study develops distress prediction models combining financial, non-financial and governance particularly ownership and board structures, on the likelihood of financial distress by using the logit model. The final sample for the estimation model consists of 172 companies with 50% non-failed cases and 50% failed cases for the period from 2000 to 2012. The prediction models perform relatively well especially Model 3 that incorporates governance, financial and nonfinancial variables, with an overall accuracy rate of 93.6% and 91.2% in the estimated sample and holdout sample respectively. This evidence shows that the models serve as effective early warning signals which are beneficial for monitoring and evaluation purposes. Controlling shareholder, number of directors and gender of managing director are found to be significant predictors of financially distressed SMEs.

Suggested Citation

  • Nur Adiana Hiau Abdullah & Muhammad M. Ma'aji & Karren Lee-Hwei Khaw, 2016. "The Value of Governance Variables in Predicting Financial Distress Among Small and Medium-Sized Enterprises in Malaysia," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 12(Suppl. 1), pages 1-77–91.
    • Handle: RePEc:usm:journl:aamjaf012s1_77-91
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    References listed on IDEAS

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    Cited by:

    1. Farida Titik Kristanti, 2019. "Integrating Capital Structure, Financial and Non-Financial Performance: Distress Prediction of SMEs," GATR Journals afr175, Global Academy of Training and Research (GATR) Enterprise.
    2. Chih‐Chun Chen & Chun‐Da Chen & Donald Lien, 2020. "Financial distress prediction model: The effects of corporate governance indicators," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(8), pages 1238-1252, December.
    3. Mangena, Musa & Priego, Alba Maria & Manzaneque, Montserrat, 2020. "Bank power, block ownership, boards and financial distress likelihood: An investigation of Spanish listed firms," Journal of Corporate Finance, Elsevier, vol. 64(C).
    4. Juraini Zainol Abidin & Nur Adiana Hiau Abdullah & Karren Lee-Hwei Khaw, 2020. "Predicting SMEs Failure: Logistic Regression vs Artificial Neural Network Models," Capital Markets Review, Malaysian Finance Association, vol. 28(2), pages 29-41.
    5. Rasa Kanapickiene & Renatas Spicas, 2019. "Credit Risk Assessment Model for Small and Micro-Enterprises: The Case of Lithuania," Risks, MDPI, vol. 7(2), pages 1-23, June.

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